We’re entering the stage of the public accounting business cycle when layoffs are more prevalent. Before we get into the strategies for protecting yourself from the specter of job loss, we should examine the recent history of the public accounting industry. The last five years have looked something like this:
2020: COVID-19 hits, shutting down in-office work for about two years. Some public accounting firms use the economic chaos to thin their ranks, but many use the pandemic as an opportunity to garner goodwill with their employees. Things are tense, but most large businesses in the services industry survive (or even thrive) during the year.
2021: Expectations of a rapid recovery from the pandemic spur a rash of hiring, poaching, and planning for imminent growth. Interest rates are low, so companies begin to saddle themselves with debt to pursue growth opportunities. This is a great time to be an employee, as firms are all competing to bolster their ranks, especially among the senior associate and manager levels. Salaries are rising quickly and signing bonuses are abundant for job hoppers as a result of the Great Resignation starting.
2022: Most of those expectations for rapid recovery and meteoric growth fall short. Businesses are still recovering, but slowly. Employees are still seeing their salaries rise, and hiring is continuing among public accounting firms, but growth projections are tapering off. By the end of the year, reality has sunk in for many public accounting firms, and the rose-tinted glasses everyone purchased in 2021 are coming off.
2023: The pendulum of optimism begins to swing the other direction. Firms are now predicting recessions and begin austerity measures to prevent crippling their businesses. Some firms enact layoffs, some encourage attrition with Return to Office (“RTO”) mandates, and others slow hiring and delay start dates for new hires. Firms see rising interest rates and get skittish about acquiring new debt, which dampens growth projections. Many employees feel compelled to stay at their current firms, even if they’re miserable, for fear of a tight labor market.
2024: Things are a mixed bag. Expectations across the public accounting industry still have a pessimistic tone, but some folks are gaining confidence in the Fed’s “soft landing” approach to tackling inflation. Interest rates are beginning to fall for the first time in several years, and companies are taking private equity (“PE”) money and acquiring each other to keep up with their competitors. Employees are finding the labor market is still tight, and the power dynamic that was so strongly in their favor in 2021 and 2022 has almost entirely switched back to the companies. RTO mandates are increasing, off-shoring is increasing, and many companies are seeing an opportunity to complete the return to the pre-2020 business environment.
Deloitte, PwC, GT, RSM, and other large firms have announced layoffs this year, impacting the advisory and audit spheres in particular. One thing we’ve noticed over our years in public accounting is that firms usually do not behave independently. If one firm decides to do layoffs, you can feel confident that several of their competitors will do the same. As such, we expect news of layoffs to continue for the near future, as firms attempt to reduce headcount from overhiring during the pandemic. Those firms that took PE money are going to be compelled by their new business partners to reduce their expenses, and cutting a swath of expensive domestic employees is a quick way to accomplish that goal.
It’s a strange time to be in public accounting. If your firm is hinting at future layoffs, or you’re concerned about being on the chopping block should things turn sour, there are some ways to help protect yourself. But before we get into the specifics, I want to clarify one thing:
Everyone is expendable. Unless you’re the one making the decisions, there is no guaranteed way to protect yourself from layoffs.
With that cheery nugget of wisdom out of the way, let’s jump into things you can do to help protect yourself from being axed.
Understand Why Public Accounting Firms Do Layoffs
Understanding the business side of public accounting is the first step in protecting yourself from layoffs. To grossly oversimplify the business model, PA firms make money from client fees and spend money on employees (salaries, travel, benefits, etc.) and overhead (supplies, subscriptions, office space, etc.). Any net income at the end of the year is either distributed to the equity partners (and sometimes employees) as a bonus, or invested back into the business. With any business investment, the goal is to make more money than you spent on the investment and its associated maintenance. Otherwise, you’re just losing money slowly.
When a firm does layoffs, they anticipate something upsetting the net income number. Maybe interest rates are rising, so debt is more expensive to acquire and maintain. Maybe subscription and technology costs are rising rapidly, or employee health insurance costs are spiking. Maybe clients are feeling the squeeze and balking at paying for certain services. Regardless of the underlying factors, accounting firms don’t want to see net income shrink from year to year. If they think income will be lower than expected, firm leadership may consider layoffs to bolster the bottom line.
To be clear, “layoffs” in this case means a deliberate, significant reduction in force driven by leadership. Public accounting firms also regularly part ways with employees who aren’t performing to firm standards. In this article, we’re concerned with protecting ourselves from the former, not the latter.
Recognize Your Team’s Contributions to the Business as a Whole
These days, most firms already run a tight ship. There’s not a lot of redundancy in public accounting, particularly in the back-office and administrative functions. When firms are looking to perform layoffs, they’ll typically look at these functions first. The employees and the functions they perform do not directly provide revenue to the firm. Please note, we’re not suggesting that back-office and administrative employees don’t provide value to the firm; anyone who has worked with a top-notch admin team knows they make every person’s job easier. It’s just that their value is hard to quantify and is represented as an expense on the income statement. If there’s any redundancy in these functions, you can expect the public accounting firm to perform layoffs here first.
If firm leadership has gotten to the point where they’re considering layoffs to the revenue-producing side (read: client-facing employees), the decision becomes a cost-benefit analysis. Leadership will look at which markets are growing, which markets are shrinking, and how long they expect these trends to continue.
If you work in a shrinking market, your team is at a higher risk of experiencing a layoff. Until recently, many businesses had been experiencing rising interest rates and had anticipated a recession. As a result, clients reduced discretionary expenses. This meant clients were less likely to pay for strategic consulting services, pursue mergers and acquisitions (M&A), or pursue riskier projects. If you work on a team that performs these services, you’re at risk in the current environment. However, M&A activity is inversely correlated with interest rates, so as rates fall, acquisitive behavior should pick back up.
Alternatively, if you working in a growing market, your risk is lower. Publicly traded businesses require audit and attest services, and everyone has to wrangle with taxes on a regular basis. Audit and tax are usually fairly well insulated from layoffs, but remember, everyone is expendable. Even the historically “safe” fields can experience forced attrition if the clients in that market are shopping around for cheaper service providers.
Make Yourself Difficult to Replace
The most reliable way to protect yourself from being terminated is to make yourself difficult to replace. If you’re a tax associate fresh out of undergrad with three months of experience, you’re fairly easy to replace. If you’re a senior manager with significant experience in a niche field and a subject matter expert on an esoteric but critical software platform, you’re going to be a gigantic pain to replace.
As you gain experience in your field, try to find areas in which you can be a specialist. There are many instances in which you can gain specialized experience simply by doing the work that others prefer to avoid. Maybe the clients are demanding or the tasks are complex and time-consuming. As long as that work brings money to the firm, there’s value in learning those skills. When it’s time for leadership to make staffing cuts, they will usually pursue the “low hanging fruit” first. That is, they’ll let go of employees in roles that can be easily rehired should the economic situation turn out better than expected.
Be Prepared to Pivot
A corollary to recognizing your team’s contributions and making yourself difficult to replace is being flexible in your role. If you’re working in human resources but fear layoffs in the near future, you may try to switch to a client-facing role for added protection. If you’re an M&A consultant and you see interest rates rising, you may consider pivoting into a tax consulting role until the interest rate environment improves.
Ultimately, you have to weigh your risk tolerance against the difficulty of finding and acquiring a role in a “safer” field. If your personal finance situation is such that you can’t afford to be without a job for several months, you may want to aggressively pursue a client-facing role in a growing market within the firm. If you think you can weather an extended period of unemployment or you can quickly find a job elsewhere, pivoting may be more trouble than it’s worth.
If You Can’t Be Great, Provide Value and Be Helpful
As we mentioned previously, in an ideal world, you’re difficult to replace. However, if you’re a new associate with little experience, your potential saving grace is that you’re relatively cheap. When leadership is deciding who to let go, there’s a tendency to group employees into peer groups and cut a percentage of each group. However, they will also compare among employee levels, simply because certain groups are significantly more expensive than others. Let’s briefly compare a senior manager to an associate:
Senior Manager:
Salary: $220,000
Benefits package: $75,000
Annual travel costs: $20,000
TOTAL: $315,000
Associate:
Salary: $70,000
Benefits package: $45,000
Annual travel costs: $5,000
TOTAL: $120,000
Laying off a senior manager provides a lot more cost-savings for the firm than cutting an associate. Furthermore, if the firm sees that the senior manager is below average (by whatever metric they use to judge performance) among the senior manager group, he is more likely to be let go. On the other hand, if the associate is showing promise, is performing above the associate group average, and is generally easy to work with, she is more likely to be maintained.
Layoffs are first and foremost a business decision. Firms aim to reduce expenses without sacrificing too much revenue. However, leadership also has to maintain a sufficient workforce so that they can continue functioning and growing in the future. Employees that provide more value than their peers, relative to their compensation packages, are attractive choices to keep on staff. Additionally, employees that are easy to work with are more likely to have advocates among the decision-makers, providing them with additional protection.
Again, when it’s time for layoffs, everyone is expendable. If you’re expecting your firm to pursue a reduction in force and you can’t afford to lose your job, your goal should be to find as many ways to protect yourself as possible. There are no guarantees, but a multi-layered approach provides the greatest chance of success.
We encourage readers to share their experiences with layoffs in public accounting. Were you surprised by who was cut and who remained? Did your leadership explain their decision-making process? Let us know below.